101chapter13

101chapter13 - 13. The Economics of Information and...

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13. The Economics of 13. The Economics of Information and Uncertainty Information and Uncertainty Risk aversion Asymmetric information (pages 333-342)
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The role of information The role of information assumption: free flow of information reality: information is costly time and money decisions under uncertainty lack of complete information some parties have more information
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Uncertainty which event will occur? With uncertainty, comes risk Risk = possibility of a bad outcome financial or property loss illness death
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concept: expected value (EV) concept: expected value (EV) need probability of outcome value of outcome EV = sum of (probability)(value) for each outcome EV is like the “average outcome” actually center of distribution of outcomes
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example 1: flip a coin example 1: flip a coin 2 outcomes: 50% chance of heads 50% chance of tails game: flip a coin if heads, you get $0 if tails, I pay you $20
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expect value of the game EV = (.5)0 + (.5)(20) = $10 Note: $10 is not a possible outcome But, played over and over, expect to average $10/game
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example 2: Lottery example 2: Lottery $2 scatch off game $0 80% $2 12% $5 7.9% $500 .1% EV = .8(0) + .12(2) + .079(5) + .001(500) = 1.135
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back to example 1, coin toss back to example 1, coin toss What if I gave you a choice….
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This note was uploaded on 04/02/2012 for the course ECO 101 taught by Professor Laniga during the Spring '08 term at SUNY Oswego.

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101chapter13 - 13. The Economics of Information and...

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